Poland fights for coal, but Russia may benefit

WARSAW — When he was Poland’s prime minister, European Council President Donald Tusk called coal “the strategic foundation” of his country’s energy security, and Polish diplomats have acquired a reputation as some of the EU’s toughest negotiators, doing battle in summit after summit to minimize restrictions on its use.

But paradoxically, Poland’s dogged defense of coal, which generates almost 90 percent of its electricity, may now end up benefiting Russia. That is because cheap Russian coal is grabbing a growing share of Poland’s market, while local coal producers bleed red ink thanks to high production costs and very low prices.

“Individual mines can still be saved, but what cannot be saved is the state-owned coal mining sector,” says Jerzy Markowski, a former deputy minister of economy and coal mining executive.

Poland’s coal sector has long been a mainstay of the economy. In communist times, when Poland’s decrepit factories produced little that the West wanted to buy, coal was one of country’s few “profitable exports” — even if it was sold abroad for precious hard currency at less than it cost to mine. The mines employed almost half a million people, and the power of the brawny miners prompted the communist regime to treat them with kid gloves.

A quarter century and €25bn in restructuring costs later, not all that much has changed. The mines now employ only about 100,000 workers, but their unions are still some of the toughest in the country. In 2005, angry miners wielding ax handles threatened to storm parliament, and the spooked politicians inside quickly voted through a generous pension program for them.

The unions have also fought hard to retain a gilt-edged pay package that has miners earning some of the highest salaries in the country. A recent report by the Adam Smith Center, a Polish economic policy think tank, finds that the average miner earns about €1740 a month, 90 percent higher than the average Pole; retires at the age of 48 instead of 60 on a pension subsidized by the government; and benefits from an overall government subsidy of €16,000, while the average Pole gets nothing.

Those fat checks and early pensions mean that labor accounts for about two-thirds of a mine’s operating cost. It costs about €77 to mine a tonne of hard coal, according to the Economy Ministry. However, last year the average sale price in Poland was only €69 a tonne. The cost of buying foreign coal, sold in Amsterdam and Rotterdam, is only about €60 a tonne. Global coal prices, battered by falling demand thanks to sluggish growth worldwide, by China’s lackluster expansion and falling oil and gas prices, are unlikely to rebound any time soon.

As a result, exports of Polish coal have plummeted and imports steadily risen. Poland imported 10 million tonnes of coal, about 6.5 million tonnes coming from Russia. A decade ago, Poland imported only 3 million tonnes but exported 20 million. In all, last year the country’s coal companies sold 70 million tonnes of coal, but dug up 72.5 million tonnes. That has added to growing coal mountains — at last count holding more than 8 million tonnes of unsold coal.

In an echo of the self-defeating economic policies of communist times, Poland’s (and Europe’s) largest coal miner, the state-owned Kompania Węglowa (KW), is being accused of dumping its coal surplus in a frantic attempt to improve its cash flow. Two rival coal miners — Bogdanka and Katowicki Holding Węglowy — have accused KW of selling coal at below the cost of mining it, something that Kompania Węglowa management denies. Bogdanka, a rare privately owned coal mine, has seen its share price fall by a quarter in the last half year.

“They are ruining the coal market,” Markowski says of Kompania Węglowa. “They’ve also ruined the coal market for themselves, because buyers are going to insist on these below market prices in the future.”

Hit by falling demand, lower prices and high costs, Poland’s coal mines are losing a fortune. The government estimates that the sector as a whole lost a net €325 million last year.

The main problem is that in the mines in Silesia, where coal has been extracted since the Middle Ages, the cheapest layers of deposits have been tapped out. Miners have to dig ever deeper to get at geologically complex seams, something that demands enormous investments the companies are too cash-strapped to afford. In some mines, the coalfaces are so far from the shafts down which miners travel that they must spend two hours getting there and two hours getting back, leaving only three hours a day for actual mining.

The sector’s funk is becoming a political problem for Ewa Kopacz, Donald Tusk’s successor as prime minister, who is trying to lead the ruling Civic Platform Party to its third consecutive victory in parliamentary elections slated for this fall. Kompania Węglowa ran into such deep trouble at the beginning of this year that the government was forced to cobble together a rescue plan. The idea was to close four of the company’s costliest mines, which would have reduced production costs and cut overproduction.

Instead, unions went on strike and Kopacz balked at becoming Poland’s Maggie Thatcher. Rather than confront the miners, she gave way, agreeing to sell the four worst mines to private investors (who have yet to be found) and put the rest into a new, and hopefully profitable, company. The whole operation is expected to cost at least €575m and still needs to be approved by the European Commission.

Despite coal’s problems, the Polish government continues to battle in Brussels against measures that would reduce its use.

After a recent EU summit dedicated to constructing the Energy Union, Kopacz declared that despite pledges to decarbonize Europe’s economy “Poland is not retreating from coal.”

One of the reasons Poland is such a strong advocate of coal is that it provides a measure of energy independence from Russia, its old imperial master. Russia supplies two-thirds of Poland’s natural gas and almost all of its crude oil. But if the country cannot figure out a way to rebuild a competitive coal sector, those hard-won victories in EU energy talks may end up with Polish power stations being fueled at least in part with Russian coal.

Politicians can’t muster the strength to stand up against unions, but if they don’t, there’s eventually going to be hell to pay because the markets will ultimately have their way. The collective won’t prevail, the market will.